The book “A Random Walk Down Wall Street (10th Edition)” was first published in 1973 by Burton G. Malkiel. The book is influential because it involves investing strategies. Throughout the book, the author investigates various techniques of investing including major and technical draws and analysis the conclusion that does not beat a passive hold or buy strategy. The author also provides insurmountable admonishment on maintaining and building an investment portfolio of varied asset classes with time. The “random walk” as depicted by the author is where directions or future cannot be predicted based on the history. In terms of investment, the latter can imply that the performance of the past does not guarantee future results. According to the author, the majority of managed funds does not beat passive indexes.
Nonetheless, the book is the best any investor should read before starting any portfolio. Due to the book’s life-cycle guide meant for investing, the text matches the needs of all investors irrespective of age. The current paper is a book report of the “A Random Walk Down Wall Street.”
The book starts by analyzing “The Castle in the air theory” and the “Firm Foundation Theory.” The author argues out that in “Firm Foundation Theory,” the perception is that every investment asses contain an anchor known as intrinsic value. According to the intrinsic value can be established by analyzing carefully the present situation as well as the prospects. It should be opposed to the asset’s present price. The view has been exposited by the classic book “Security Analysis” by Warren Buffet (Malkiel, 2011).
In essence, based on the Firm foundation theory, individuals or company should invest depending on the actual real value of the investment they plan to make. For example, if an individual purchases stocks from a company, the stock is dependent on the importance of a company providing the capital. On the other hand, the theory of the “Castle in the Air” implies that companies or individuals are supposed to make investment based on the actions of the crowd. Based on the latter theory, one makes more money by climbing on the bandwagon or emulating what any other investor is doing in the market. According to the author, the approach requires one to follow the trends in the market or invest based on the foundation of the firm. The two theories are correct depending on when they are applied.
John Maynard supports the argument of the author in early 1930s who also promoted the theory of “Castle-In-The-Air.” According to Malkiel (2015), the theory postulates that the prices of assets tend to be driven and influenced by mentality as well as the crowd of investors who purchase them. When people buy the stocks, the prices increases and more people are encouraged to buy via the open-loop cycle. A similar thing takes place if the prices fall drastically due to the selling and falling of the prices. According to Malkiel, the investor who succeeds is the one who manages to guess or estimate the next move of the castle or what the crowd is about is destroy or build and react before the actions of the crowd. It is worth noting that the approach by Malkiel misses an element of psychology from the Firm-Foundation theory. More so, investor’s anticipations were used as an element book of Keynes “The General Theory of Employment, Interest, and Money.” Nonetheless, Malkiel addresses the issues of bubbles to illustrate how the valuation of assets goes awry.
In chapter two, the author analyzes the financial trends throughout histories such as the Tulipomania, the Wall Street crash experienced in 1929 and the South Sea Bubble. In all the instances as mentioned above of financial crazes, a market was created like gangbusters until all things became overvalued. The values later went down to normal very rapidly. Different graphs illustrated in the book depict the effects very clearly. Indeed, within two years after the craze ended, the prices returned to normal, and everything was as it used to be before the trend started.
Chapter three of the book covers the stock valuation from 1960- 1990s. The author analyzes different markets, which go crazy before leveling off to normal. The author uses different instances of cross-sections of market stock where the trend has taken place within periods of five years. For example, the overvaluation of the 1980s food stock has been reiterated in the chapter several times to depict the impact it had. Additionally, the Nifty Fifty of the 1970s where people speculated the blue chips with the speculation end after some time when the stock went to normal is also addressed in the chapter.
In chapter 4, the author analyses different aspects of the biggest bubbles. It was commonly referred to the surfing on the internet. During this time, technologies such as cloud computing and online communication were starting to take shape. These technologies were experienced the 1990s as well as early 2000. According to the author, the considerable bubble resulted from the confluence of a similar bubble before, and all worked in concert. The bubble involved the IPO mania experienced in 1960s stock market dubbed the smoke and mirrors deal allied to the South Sea Bubble as well as the chasing future efficiencies that took place in 1950s. The latter had railroad stocks that took place with the dot.com business. Surprisingly, it went high before crashing down, and everything returned to normal. The author tries to illustrate that it such instances were not a coincidence. According to the author, markets are efficient, and repeatedly, if there are inefficiencies, the markets have to do away with the inefficiencies with time.
Chapter five of the book addresses the issues allied to fundamental and technical analysis. The professional study done in this chapter in some way aligns with “Castles-In-The-Air” addressed in Chapter 1. Malkiel is against the theory because he relates it to the act of forecasting the future by the use of animal parts. The chapter also addresses other technical techniques such as “Super-Bowl Indicator,” “Dogs of the Dow” and the theory of “bull markets and bare knees.” The latter theory demonstrates the correlation between the bear/bull markets and the average length dresses of women in a year. According to the author, when the skirt is shorter, the market is also bullish. In my opinion, such comparisons are pathetic.
Chapter 6 of the book is completed technical analysis decimation. The only part that can be said to be devastating is when the author compares various stock markets to average lengths of hemlines in the fashion of women to get a correlation. However, the majority of the relationship are normally spurious at best. The chapter uses numerous charts to help understand various concepts allied to technical analysis.
Throughout the chapter, the author addresses the issue of resistance, stochastic oscillator, momentum, Bollinger bands as well as the double top reversal patterns. The technical analysis predicts the future price movement allied to stock. TIt is done by “reading the tape.” The study uses only the trends indicated in the trading history of the capital. The other facets such as the growth forecasts, balance sheet and the various conditions in the markets are ignored.
Additionally, the author uses the notion of market inefficiency to address two forms of analysis taking place on Wall Street. These include fundamental analysis and technical analysis. According to the author, technical analysis refers to the study of various behaviors of market prices by use of past performance to speculate on the likable future performance. The latter mostly make use of trend lines and complex charts. Conversely, the fundamental analysis includes analysis of the business health by dissecting the business financial statements, the industry in which the market competes in as well as the other competitors in the industry. The chapter strives to introduce fundamental and technical analysis through the author is more skewed to fundamental analysis compared to technical analysis.
In chapter seven, the author analyses the imperative of fundamental analysis. To a greater degree, structural analysis is allied to the Firm foundation theory. It involves the study of the market data, balance sheets, growth prospects, and future trends as well as company management. Although Malkiel is sympathetic to the fundamental analysis, he notes events that are random as mentioned above conspire against the performance. Additionally, Malkiel believes that structural analysis is thriving compared to technical analysis because there are few actively managed funds. The managed funds tend to beat the S&P in the long-term.
More so, it is worth noting that Malkiel analyses the fundamental analysis with respect since it is dependent on foundational logic. Additionally, fundamental analysis opens to acceptance of wide and different varieties of data. Nonetheless, according to the author, structural analysis is also deeply flawed. Malkiel argues that numerous reasons make fundamental analysis off bases such as company’s dubious financial data like Enron, random events like 9/11, loss of good analysts, as well as human failings like incompetence and emotional attachments. The author tries to depict that the professional analyst may be more knowledgeable compared to the average investors. However, Malkiel is keen to note that the latter is caused by the fact that the professional analyst has ready access to data and information. The advantage is, however, minimal.
Most significantly, criticism against the fundamental analysis mostly aimed at “Efficient Market Hypothesis as well as its different flavors. It has been under fire recently as one of the reasons why some markets are not efficient. Indeed, this analysis, as well as the Efficient Market Hypothesis, were invalidated by Warren Buffet in 1984 via a speech. Nevertheless, Malkiel did not respond to the argument of Warren Buffet. However, at some point, Malkiel includes a quotation from Graham before his death in 1976 claiming that Benjamin Graham was on the school of thought of an efficient market.
In my view, it would be imperative to separate the ideas opined in the book while reading. It is because; much of the depicted random walk is more of market randomness and the best way of mitigating risks maximizing returns. It does not strive to justify or prove the EMH itself. Instead, Malkiel claims that the market is efficient naturally because prices tend to move quickly in response to raised news. Since news develops unpredictably and randomly, then it becomes evident that the market is unreliably predicted.
In chapter 8, the author addresses the issue of modern portfolio theory. It is imperative to note that modern portfolio theory uses varying levels of volatility and risks between different assets to make total returns better in a diversified portfolio. Harry Markowitz invested this for the first time in the 1950s. Indeed, Harry Markowitz managed to win the economic Nobel Prize in 1990 through the portfolio theory.
Nonetheless, portfolio theory is the notion that people should have a varied and diverse investment selection. The selected investment, however, should is supposed to maximize the reward but minimize the risks at the same time. According to the author, the rate at which an individual diversifies their stock, as well as other assets, does matter much because one will always be exposed to some risks. In brief, the author reverses the modern portfolio theory. Nevertheless, the author goes ahead in the next chapter to illustrate why minimization of danger is never the best strategy for companies and individuals.
The author discusses the issue of reaping gains of reward via an increase of risk in chapter 9. The chapter exposits about different ideas concerning modern portfolio theory as well as the concept of beta used to calculate the portfolios. In this chapter, the author illustrates that investment stock is divided into two categories: unsystematic risk and systematic theory. In systematic risk, the effects are felt by the market or the economy as a whole while in unsystematic risks; the risk is generally to the specific company like in the case of the impacts caused by new products development or strikes.
Nonetheless, according to the author, beta is any number that expresses the proximity of the matching stock to the overall behavior of the stock market. Therefore, in theory, the shares that have high beta increases rapidly during bull markets and decrease fast during a downturn. The concept is accurate when applied with a broad scope. However, when it comes to specifics, the idea rarely turns out to be true.
It is imperative to note that, in the cases of stock, holding 50 diversifies stocks in the United States minimizes the portfolio risk by about 60 percent apart from having limited impact. Addition of international stocks to such portfolio tends to reduce the dangers allied to the capital even further. Malkiel notes that diversification of the collection with the high number of shares minimizes risks. However, it cannot finish all the systematic uncertainties in the economy or the market. Indeed, he notes that the core measurement of the vulnerability of routine is the beta. Nonetheless, Malkiel does not trust the use of beta fully.
Chapter 10 of the book addresses the various issues allied to behavioral finance. The section directs the multiple problems allied with overconfidence such as taking on risks. The chapter also discusses the issues of bias as well as some admonishments for evading some of the bad behaviors in regards to investments. According to the author, behavioral finance majorly applies emotional preferences and human cognitive in people’s choices of investment and the effects of the biases to the overall market. Indeed, from the chapter of behavioral finance, it can be concluded that the part that works are the ones with common sense. In other words, individuals need not invest long term in what is not right at present, should not overtrade and that people should only buy stocks, which are losers.
The chapter 11of the book all about a series of criticism of the general ideas contained in the book. The author commences the section by discarding some of the argument that lacks basics and support. He later moves on to some of the better evidence that supports the whole idea. The author then ends the chapter by evaluating the concept of Benjamin Graham, which postulates that people need to identify and invest in their money in value stock for the most extended term. Malkiel deconstructs most of the ideas from Benjamin Graham and has trouble with the argument presented by Graham. In my opinion, the Malkiel missed the point on the arguments presented by Graham. The evidence of Graham is that value stock always remains to have value. However, Malkiel believes that in the long term, both value stocks and growth end up matching with the overall market. However, Malkiel opines that the value stock lacks the large dips possessed by growth stock. It is worth noting that the general idea in the book is that the market is efficient and will always revert to normal or the mean.
Chapter 12 addresses the issues of investing wisely. The section admonishes people on matters concerning getting emergency funds, ensuring that one is insured well as providing that one invest as much amount as they can into tax-sheltered accounts. Additionally, it revolves around building a healthy investment foundation same as the investments contained in different investment books. For instance, one can save their cash in accounts such as the 401 (k) s and Roth IRAs. The chapter also offers advice on standard personal finance. The author encourages people to have homeownership.
Chapter 13 offers practical strategies and advice for the construction of an investment portfolio. The chapters also incorporate various warm-up exercises meant to prepare different investors right from the management of cash reserves to tax considerations and definition of objectives. The section addresses the issues of past performance never being a guarantee that a company or an individual will exhibit similar results in the future. Individuals can only use past performance broadly and partially to indicate their future. According to the author, over a long time, stocks tend to beat inflation and bonds. However, with periods less than a decade, the investment is random and is based on the risks an individual is willing to take.
Chapter 14 of the book addresses the issues of return of bonds v/s stock, as well as the comparison the earnings growth, initial dividend yield as well as change in valuation as the main contributors of stock total return, have changed over time. The chapter also details the guidelines needed when individuals want to invest in themselves. In brief, if an individual’s goals are over one decade off, such people should be spent in stocks for the long haul. However, if their goal is short term, the trick is being diversified and making investments with lower risks (cash and bond). According to Malkiel, investments made in a target retirement fund is usually a brilliant idea.
Chapter 15 is the last chapter written by Malkiel in the book. The author admonishes that for other investments such as managed funds; an individual should always be watchful or ignore them. The chapter also expounds on the various portfolios for various investor profiles. Such profiles have different combinations such as bonds, cash, bond substitutes, as well as stocks and Real Estates. It is also worth noting that the author makes different tips concerning investment. In brief, if an individual lacks the time for micromanaging things, the only solution is investing in index funds. However, if an individual is after chasing personal stocks, the answer is minimizing trading. Such people need to buy shares are reasonable as well as those with numbers. Additionally, it is imperative to look for stocks with stories upon which individuals can quickly build a “castle in the sky” addressed in chapter 1.
Nevertheless, I can advocate the book to anyone because it is an exciting read with simple grammar and illustrations. More, it is worth noting that the book has been updated several times. Indeed, the book has been among the finance books that are updated as time surpasses and is founded solely on seasoned knowledge and historical analyses.
Note that the critical idea throughout the book is that markets tend to be reasonably efficient and ordinary people would do the same as experts if they managed to buy diversified fund portfolios as long as they held them for many years. Although the information contained in the book appears weighty, the load of the figures and facts should not be a hindrance to the reader. It is the desire; aspiration and interest in making investments that should make the reader invest in working for them. Primarily, the entire chapter analyzed in the book is vital and everybody who needs to invest should take time to read them.
Malkiel a professor of economics in Princeton as well as the department chair like an efficient market hypothesis. The efficient market hypothesis postulates that although the market has errors due to the involvement of prediction elements, the market is proficient because things tend to adjust in the long term. Since there is never a single formula for predicting the prices of the future stock, the author argues out that striving to forecast the future depending on the past performance is silliness. That is why Malkiel prefers the “random walk” via the alleys and avenues of investing and finances.
The author has expounded on different theories of investment as well as the various kinds of analysis used. Through different approaches, the author breaks down investing in two categories: finance based on actual stock value and investment based on the bandwagon effect. The author also recounts the various stock crazes from the first to the last one. It makes the reader understand that there is a pattern exhibited in the market that goes irrational and levels out. Such effects are caused by the fact that markets tend to be efficient and can adjust when faced with occasional inefficiencies.
The author manages to convince the reader that the probability of beating the market consistently is slim. Therefore, it would make more sense if individuals used a broad-based index fund if they need to invest. Malkiel argues out that indexing is the only strategy for investing in both bonds and stocks. The author has also managed to explain the psychology of spending as well as offered several tips on what needs to be avoided. Note that there also various admonishment for individuals who wish to invest. As the reader, one gets detailed descriptions of the individual’s portfolio well as its features based on different ages.
In conclusion, the author managed to expound on the various issues allied to investment throughout the 15chapters. The book has been written concisely and accurately that enables the reader to understand the content. The author has also used various examples to illustrate how markets operate. The book is, therefore, an enjoyable read that can be advocated anyone wishing to invest in shares and stocks. Nonetheless, for safe investment as postulated by the author, it is advisable to spend using the buy and hold strategy. Assuming more risk when an individual is young is not commendable because the individual still has many years to work.
Nevertheless, all the information contained in the book is worth reading and probing through for financial investment knowledge as well as an investment in shares and stocks. Indeed, through a sense of humor, the author offers the engaging economic narratives based on his thoughts. The author, however, offers alternative views and perceptions along his beliefs and opinions in case the readers disagree with what he believes. Indeed, for the people with interest in understanding the benefits allied to the functions of personal investing as well as Wall Street investments, this is the best book, which offers excellent information.
Malkiel, B. G. (2011). A random walk down Wall Street: the time-tested strategy for successful investing. WW Norton & Company.